How Much Should I Pay My Employees? An Introduction to Compensation Philosophy

Developing a compensation philosophy—and doing so sooner rather than later—is one key way to get compensation right. But what exactly is a compensation philosophy, and how do you go about developing one for your startup? 

When done well, your compensation philosophy can set the stage for building a more transparent culture and building trust with employees. 

What is a compensation philosophy? 

A compensation philosophy is a statement that standardizes your compensation practices and puts the “why” behind every compensation decision your company makes. If all compensation information was made public to every employee at your company tomorrow, your compensation philosophy should be robust enough to justify the decisions that have been made. 

When done well, your compensation philosophy can set the stage for building a more transparent culture and building trust with employees. 

How to develop your compensation philosophy 

We talked with Sabrina Kelly, the VP of Talent at Techstars, to get her advice for early-stage founders who are developing their compensation philosophy for the first time. 

Sabrina explained that compensation philosophy is not one-size-fits-all. It should be created through a process of discovery among co-founders or a core leadership team. She also emphasized the importance of doing this sooner rather than later, because while setting compensation subjectively might not cause any ripples among a team of four to six people, it will undoubtedly raise difficult questions at scale. 

One of the most valuable, and often under-appreciated, tools for setting compensation is benchmarking data. Using benchmarks early on and deciding what ranges you want to target will have a great impact on your compensation strategy, but getting reliable and up-to-date market information can be challenging due to the variety across startup roles. Sabrina recommends using the Option Impact Tool by Advanced-HR: “At Techstars, we use this tool to give our portfolio companies access to updated cash and equity benchmarks by funding stage, geography, and revenue.” She advises founders to tap into free resources like these and use them to build consistency and equity in their pay practices. 

Interested in learning more? Join us for an AMA with Sabrina Kelly and Options Impact on August 28, 2019 at 12:00 pm Eastern Time to learn about setting a compensation philosophy and utilizing compensation data for hiring and benchmarking.  

You will learn about how you can use Options Impact survey data to optimize your compensation strategy and hear directly from Sabrina on steps you can take to build a compensation philosophy for your startup.

See more content like this in the People & Culture Toolkit → 

Building Your Team: Focus on People, Not Jobs

When building a startup, we put strategic forethought toward product development, marketing, sales and other core functions. But all too often when building a team, we wait to dedicate focused attention until we feel pain.

That pain leads to a public cry for help…a job description posted on our careers site and out in the world via job boards, social media and our networks. The description is packed with a wish list of skills we wanted on the team months ago and a list of objectives that we think we wanted done yesterday.

After posting, we spend hours (weeks, months…) in a mind-numbing cycle of looking for the rare needle in the haystack among an inconsistent flow of mediocre inbound applications. Maybe we get lucky and find someone great.

More often, we squint hard to convince ourselves that the best of the bunch is a good enough fit – that we are better off having someone working on the problem today rather than waiting for the perfect candidate – or we begrudgingly spend a staggering amount of money on an outside recruiter.

In order to break this cycle, we need to focus team building activities around people not jobs.

Jobs are ephemeral, particularly in a dynamic, high-growth startup environment. If the person you hire stays at your company through the vesting period associated with their initial option grant, they will likely have at least a few different formal job titles in addition to the near-constant iterations associated with evolving goals, responsibilities and company needs.

In contrast, people have relatively immutable intrinsic characteristics and accumulated experiences that they bring to your company. It is these characteristics and experiences that make your best hires truly game changing for the trajectory of your business.

You don’t have to wait for acute pain to strategically build your team with the right people.

To shift your approach to team building from a focus on jobs to a focus on people, take the following steps:

Determine Key Intrinsic Characteristics

What inherent qualities are most important for people to possess so that they can make an exceptionally positive impact for your customers and your culture?

Define Profiles

Rather than specific job descriptions, create broad profiles that describe distinct groups of people you need to scale your business. For example, you might define a single profile which encompases early-career marketing, product and operations roles which draw on a similar toolkit.

Prioritize Networking

Create and schedule space to consistently invest in meeting new people who fit the criteria you defined in the steps above. Aim high – strive to meet the people you would love to work with regardless of the context. Networking is like healthy eating, the long-term benefit is real but it doesn’t feel as alluring in the moment as ice cream.

Nurture New Relationships

An intentional investment in networking will yield new relationships. Keep conversations warm with periodic check-ins, ask for referrals and offer your own. Aligning on timing requires some serendipity, but luck smiles on the prepared.

Set Goals, Measure Results and Iterate

Like any other strategic focus area in your startup, you should set specific goals, gather feedback, measure results and use the insights you collect to iterate on your approach.

Upcoming posts will provide more detail on how to implement each of these steps in your organization.  We’d love to hear about the challenges you face in building your teams and the ways you’ve overcome those challenges – please share via comments.

Thanks to my co-author for this post, Kendra Haberkorn. Kendra has spent her career focused on the different elements of the employee experience at companies including Craftsy, where she led the People function, McKinsey & Company, Sports Authority, Accenture and now Guild Education. Please feel free to contact Kendra via LinkedIn.

Building Organizational Culture in Your Startup

How do founders go from a couple of people toying with an idea, to managing a great team with values, good rapport, and everyone’s favorite phrase, strong culture?

Recently I set out on a fool’s errand to gain some insight on building organizational culture in startups. The truth is, this field of research is still in its infancy — not a lot is known.

We know a lot about organizational behavior in established firms and how they design their culture. But, startups are trying to build something that’s never been built before and they are brand new companies. By nature, startups are super weird and hard to make sense of in a way a researcher would like to.

There are lots of organizational culture theories out there when it comes to startups. It is 80 percent the founder of the company. It is established in the first 20 people. Things get weird after 150 employees.

A while back, researchers published a study in the California Management Review about different models of organizational culture in high-tech startups, which I believe are still hold relevant lessons for entrepreneurs today.

The study looked at five types of organizational models: Star, Engineering, Commitment, Bureaucracy and Autocracy. The researchers identified how each model retains, selects, and controls talent.

Star model employees are high-skilled talent that will grow and develop with the startup.

The Engineer model has high-skilled employees producing high-quality work, but they may expect to have beer and ping pong tables around.

The Commitment model treats employees like they are family.

The Bureaucracy model formalizes the work environment.

Finally, the Autocracy model pays their employees a lot for more transactional assignments.

Many companies choose a hybrid of these employment types. I will share some of the study’s findings and the implications for startups.

Choice Model of Startups

While startups vary on the model they choose to use, the Engineering model seems to be the Silicon Valley default. Furthermore, while VCs more commonly bureaucratize startups, VCs also attract many other different types of cultures and like the emotional bonds of the Commitment and Star cultures.

Does the Founder’s Background Impact the Model?

Founder background does not link to a particular employment model. The founders’ intended business strategy seemed to have the most bearing on the employment model chosen — marketing, service, and customer based models went more toward a Commitment employee model.

Think Zappos, which continues to be a company that is known for their organizational culture and customer service.

How HR is Leveraged in Startups

Companies that had a Star or Commitment model brought HR expertise in earlier than the other employee models. According to the researchers, star companies need HR expertise to recruit and attract Star talent. Commitment companies use HR to build a strong culture as a talent and retention plan. Engineering companies make sure employees have access to enough caffeine, sugar, and alcohol to fuel their startup environment. Bureaucratic companies rely on HR mainly for administrative purposes.

Success and Pitfalls of Employment Models

According to the research, companies with a Commitment model are the fastest to IPO. Companies with the Autocracy model were most likely to fail. However, Star and Commitment models can be more difficult to scale. Star models deal with turnover issues because of the need to screen out the non-stars, and they rely most heavily on equity options, so when it does not look like the equity will work out, employees are more likely to leave.

Transitioning to a New Model

Transitioning from one model to another can be negatively disruptive and costly. Companies that were founded on Star or Commitment models that switch to another model have a hard time with the transition. Bureaucracy, for example, would be a difficult adjustment from the Commitment model, particularly because this often involves the departure of their founder-CEO.

The researchers explain that it is incredibly common for startups to not put the thought into culture and HR, however they cannot imagine a scenario where a startup does not have a strong and thought-out plan for marketing, pricing, fundraising, and the milestones attached to those things.

Knowing how important talent is for startups, this non-strategy strategy can be a big limitation down the road.

At Techstars, we try and help companies think through organizational culture and other points along the way to success. By helping companies understand the type of organization they want to run, hopefully they will think more about their plan to build a sustainable organizational culture.

What model does your company follow? If you could have thought more about this earlier into your startup, would you?

Why You Should Hire on Characteristics and Train on Tactics

At any given point in time at a fast growing startup, you’re hiring across functions, levels and specific disciplines. It’s difficult to find someone who checks the boxes across the most important skills, let alone someone who has the combination of those talents plus the more intangible qualities or characteristics that have the potential to accelerate positive outcomes, specifically at the critical early stages.

We recommend you dare to hire based on characteristics and train on tactics – emphasizing intangibles over functional skills as you plan for and develop your talent priorities.

As we pick up the thread on strategically building your team with people, not jobs, we want to share insights on how you can determine the key characteristics that, when represented throughout your team, will contribute to alignment, momentum and ultimately long-term success.

Once you have the key characteristics codified, defining profiles, prioritizing networking, nurturing relationships and measuring results will come more easily.

Whereas company values are centered on beliefs and competencies around existing or developing strengths, characteristics are inherent qualities that individuals possess and exhibit in life and at work.

Startups need to determine which characteristics will be most important in differentiating and driving performance – now and in the future. Importantly, these characteristics should ring true regardless of the role, function, level or tenure of a team member.

Where should startups begin?

Leave Roles and Skills Off the Table

Think broadly about your team and what you need them to display day in and day out to give your startup the best chance for success. We find characteristics like intellectual curiosity, ownership and drive to be key differentiators across all disciplines and career stages.

Prioritize the List

There are a hundred things you could put on the list, but when assessing talent, you have to optimize for what is most impactful since it’s rare to find someone that will possess all of the characteristics and all the skills you need for a given role.

Clarify How You Believe these Qualities Manifest in an Individual’s Life and Career

As you recruit and evaluate potential team members, you’ll need to identify experiences or sources that are likely to correlate with individuals who possess the characteristics. Be creative and open-minded here. This is a unique opportunity to explore more diverse sources of talent. Because characteristics are inherent, you may discover and unlock new avenues or profiles that complement and enhance the existing makeup of your team.

Determine a Consistent, Structured and Focused Way to Evaluate Characteristics

Spend time building out a thoughtful line of questioning that helps you understand and gauge how a person has demonstrated these characteristics consistently and with tangible results.

Dare to Hire on Characteristics and Train on Tactics

If you find a person who has all the characteristics but has gaps on other dimensions, take a chance. Transforming inherent qualities is tough, while developing skills and expertise is achievable.

Dedicating time and effort early in the life of your startup toward creating a people-focused team building approach will help you successfully navigate the complexities of recruiting, performance and development as your business evolves and grows.

Thanks to my co-author for this post, Josh Scott. Josh co-founded and was the COO at Craftsy, an online education and eCommerce community for passionate makers. In this role, he hired hundreds of colleagues as the company scaled to serve over 10 million members. Now, Josh is a board member and/or advisor to companies including: Betabrand, Havenly, Guild Education, and Craftsy and is a Techstars Mentor. Please contact him via LinkedIn.

Over the last decade, Techstars has grown a worldwide network with 100 exits, 1000 companies in the portfolio and 10,000 jobs created by those companies. Want to be a part of it? Learn how.

Firing Someone for the First Time – Five Critical Steps

As a new CEO, it is only a matter of time before you have to fire someone for the first time. Nobody starts a company to fire people, but the reality is that it is rare to run a company for any real length of time without having to do it.

There are many different reasons why you might need to do this. There are a variety of performance reasons and, particularly in fast-growing companies, there is the issue of people who simply don’t scale—some people are a lot better at starting companies than they are at leading large teams.  I’ve written about a variety of these groups and their characteristics before so I won’t repeat that all here.

I am also not going to talk about laying people off or making them redundant, which is a related but actually very different process. Today I’m going to focus on the steps you need to take before firing someone for the first time. For obvious reasons, it’s a subject that is not commonly discussed, so my intention is help CEOs and founders find their way along a path full of potential difficulties, embarrassments and awkwardness.

Step One: Get the Legals Right

It might sound like a simple point, but put it this way: if you get the legal aspects of firing someone wrong, it could have a catastrophic effect on both your business and the individual concerned.

The legislation surrounding firing people is well defined in every jurisdiction.

Popular culture leads us to believe that firing people is hardest in France and Germany, and comparatively simple in California and New York. This is a commonly held fallacy – the process of firing people is tricky all over the world, as it should be.

So before you engage with the employee in question, hire a lawyer who knows what they’re doing, and who has done this before. Nailing the legals will save the process from spiraling out of control, will protect you from racking up a large legal bill as you fix a mess later and help to ensure that the leaver doesn’t exit with a very sour taste in their mouth.

Step Two: Put Yourself in their Shoes

You need to be very honest about what you’re about to do: you are firing someone. No matter how considerate you are, and how understanding they are, the person you are about to fire is going to have a bad day.

Remember a few things: the person you’re firing is talented. You hired them for a reason. They obviously exhibited something that you, or a member of your team, valued very highly only a few months or years prior. They haven’t lost that spark, it’s just going to shine brighter somewhere else.

Therefore don’t make it more awkward than it already is. Consider things that will matter to them: have the conversation in a neutral location, and pick a time of day when they won’t be under the watchful eye of their colleagues, who will know that something is amiss. And, above all, be ready for the fact that it’s going to be a tough conversation for them and, unless you’re a robot, you.

Step Three: Think about Yourself

I don’t want people to start shaking their fists at me, so by way of caveat: being fired is, quite obviously, the worst part of the deal. But having to fire someone is also awful.

Nobody who has founded a company enjoys having these conversations – save for a few organizational sociopaths who belong in clichéd HBO workplace dramas.

It is unwise to go into these meetings without considering how this is going to affect you. Give yourself some time to rehearse the conversation, and consider how this will impact you emotionally. Of course, these conversations rarely run exactly according to the ‘script’, but this will help guarantee that there are fewer surprises for both of you.

Also, remember that what you are doing will make things better for you, better for the business and, even though it may not feel that way at the time, it will—in the long run—make things better for the person who is leaving the company too.

Step Four: Be Helpful

There are very few occasions where it is inappropriate to be helpful. Unless circumstances are dire, feel encouraged to provide accurate and fair references; and help them, in whatever way you can, to get their next job.

Remember that this person isn’t going to disappear, and they will usually hang around the same industry for a long time. They will talk about your company, and if you help them on their way out, they are far more likely to remain comparatively positive.

The one footnote here is that you should talk to your lawyer first. In rare situations, you may be prevented from doing some of the above due to legal constraints.

Step Five: Think about the Rest of the Team

It is understandable to consider only yourself and the person you’re firing, but you have to also think about your entire team.  This step is the one that I find most rookie CEOs forget to address the first time.

You may have already considered those who work closest with the person who is going to lose their job. Often you won’t be able to talk to them ahead of time, but commonly you will have your immediate plan of action ready to go: you know who will step into the breach in the short term, and whether you’re hiring a replacement.

But you need to share the news with the team at large. If your company is still a size where it is realistic to hold an all hands meeting, do so. Address the team, express regret, and take time to explain that why the course of action that has been taken was the right thing to do.

Your team will benefit greatly from the closure that this process affords. It is far better for your staff to hear an honest explanation, rather than to regurgitate water-cooler rumours that the CEO hasn’t been brave or visible enough to quash.